Thursday, March 23, 2017

Revisiting Freight Management as an investment

Traditionally, Malaysia has always been a strong hub for trade. With trade, comes the services needed towards trade, i.e. logistics, which involved the services required of it including, haulage, trucking, clearance etc. Now, I believe will involve another wave of logistic enhancements in Malaysia especially with the expansion of e-commerce.

If one can remember in 2012/2013, DRB-Hicom made a huge purchase of Proton. The Proton deal does not do good for the group as it created huge losses over the last few years. However, if one can remember, at almost the same time, it also acquired a controlling stake (then was around 30+%) in POS Malaysia.

Over time, it has managed to hold a more than 50% of POS Malaysia through several exercises - among them acquisition of Konsortium Logistik Berhad, restructuring through injection of KLAS and several other smaller companies.

The government over the last few years have been talking about expansion in this area of business. Logistics involve plenty - from ports, highways, airports, business infrastructure, people talent and the business enablement. Imagine, we are continuously talking about building new ports or at the very least expanding the existing ones.

I strongly believe that the continuous investment into this area of business will successfully enhance Malaysia as a strong logistic hub. I believe that in several areas, such as banking, plantations, upstream oil and gas and even construction - we can only do so much in Malaysia. But in logistics, because of our geographical location - we can have more than our country's capacity can provide. It definitely involves services strength and Freight Management is largely about that.What about Freight Management that interests me

Not a household name, but in any case there are rarely household names in freight businesses.
As a listed company, it is one of the least noticeable. (The lesser the people notices, the better.) It is in a growing space and it has great management which I will explain below. Also, importantly, it is not expensive (RM245 million market cap, PE around 10x-12x) and yet to really move much in terms of stock price as compared to many other companies recently. Dividend is also consistent and yield is good.

Not everything requires the ownership of the entire foodchain - integrated offerings no doubt - but one does not need to own all. Freight Management is about that. I had an article which I would like to bring back. In fact, there has not been much changes of its business since that article. Additionally, one can understand the business more here and here. In terms of business, I like it for its asset light-er strategy as compared to many other competitors.

When a company has a strategy of less asset, it has to have a strong services and integration arm.

The statement by the CEO sums it:

(The company specialises in transporting less than a container load (LCL) for customers which Chew says is a niche business. “We are probably the only listed company that sees freight being our core business. Some other similar companies may be strong in third-party logistics, warehousing or even the last mile delivery,”)

Diagram 1: Last 5 years numbers

For the last two years, its revenue has stagnated a bit but this has picked up for its FY2017 as highlight below. The main thing is that though, its revenue growth is pretty consistent (as well as Profits) over the last 10 years which signifies the strength of the management. The CEO has mentioned of 15% growth target annually.

During 2015 and 2016, there was a period where business volume has gotten tougher partly due to challenges in reduced consumption due to GST and the challenging international trade scenario, as probably volume in/out China has been affected. This is also, as mentioned in the article, where the company invested into a new warehouse for pharmaceuticals and healthcare. Hence, its depreciation has increased.

Freight's strength is in seafreight business (quite common) while 3PL & warehousing and airfreight comes in a distant second and third.

In terms of the type of services and container mode, its import and export is quite balance - potentially signifies that, Freight mainly does operations for its export clients which will be importing and value add and later exports those products AND/OR, its customer type is just well-balanced.

On e-commerce, it has embarked on that space by having a 65% stake in FM Hubwire Sdn Bhd. This is still preliminary and it is not profitable. It just to show that it is looking at this space as an opportunity.

Dividends

As provided in Diagram 1 above, its dividend numbers have been pretty consistent - upped from 4% in FY2012 to 5% in FY2016. This is despite its profit coming down for 2015 and 2016. Normally, for a company to be able to do that - it has 2 things in mind - the reduced profitability is only short term in nature (hence it has comfort to provide a consistent dividend) and cashflow is strong enough for it to do that. At 5% dividend, that translates to about 3.78% dividend yield. (I know that at this moment, it is not that important when stocks are appreciating, but when the tides run low - you know what the rest of the sentence will say).

I have decided to purchase 7000 units at RM1.32.

Note: Not all freight and logistic companies do well, but Freight Management seems to be the one that does well.

11 comments:

I have bought into two logistic company, just to share some reasons on why i bought

1)Tnlogistic

a. I think the listing of its warehouse into reits will create value to the shareholders. Tnlogistic is now trading at market cap of 700m +, while the estimated value (from research house, not finalised one) is around 500m - 600m, that is only include some but not all of its warehouse. Even we deduct the debt related with warehouse of around 250m, the figure is still looks good for me.

b. Current Pe for logistic company are above 11, some courier company even trade above 20. Tnlogistic with the largest warehouse capacity and logistic business in malaysia traded at only PE 9. Although it could be due to its property business, i still think that the listing of warehouse business will help to create value and hence potentially higher PE

c. They are venturing into last miles delivery, and their new trucking route from Malaysia to China looks promising with not only higher margin but i expect the trade between China and Malaysia will increase too in conjunction with Jack ma venture into Malaysia, or the Dftz.

d.They are still expanding their warehouse capacity, addtional 40% gradually till 2020. They are doing what they do best.

2)Tasco

a. I particularly like their venture into cold chain logistic, as this segment is not easy to do given its high cost of investment. Their purchase into cold chain is a smart move for me. They spend around 188m to acquire one of the market leader in cold chain logistic, (Gold cold owned the largest cold room in term of capacity in Malaysia).

b. Malaysia vision to become global halal food hub is an opportunity for them too as they have halal certification. While china has huge muslim population, i think it will help in its cold chain business too.

c.Providing cold chain business is like the last piece of the puzzle. They are providing one stop logistic solution now.

d. Yusen as Tasco's largest shareholder, who is owned by one of the largest logistic company in Japan. Such collaboration will create synergy to tap into this borderless industry. In fact, tasco can leverage on the coming 2020 Japan organised Olympic, as some of the suppliers for Olympic 2020 are their existing clients.

OF course both of the companies are showing constant growth in terms of revenue and profit throughout the past few years. However, both will be highly leveraged due to their investment. Tnlogistic is expected to pare down their debt through warehouse listing, while tasco (after the acquisition of two companies gearing will be above 1) might be using equity financing.

There are some of defensive nature in logistics In fact, logistics is growth - not defensive. the defensiveness is in the margin of safety. I like Tasco as well (Japan client). Century is just fine.

Personally, I am more comfortable with Freight Management. In any case, there seems to have a decent barrier of entry towards this business as the larger players will continue to be stronger.

In getting more and more companies to sell overseas (exports), the local brand will become more prominent.

I am also aware of companies such as GDEX (courier) and POS Malaysia. These are to me even easier to forecast. They are expensive though - as the ecommerce story has happened for a while. In my mind GDEX will win against POS in the courier business.

POS, I know has tried to obtain the old LCCT for a while and now that hub has been changed into a DFTZ - which POS will be involved.

I however do not have confidence towards the management.

You will notice that to me management is very important - not just business concepts and contracts. Logistics is about being competitive.

You see the fluctuation? I can't figure out for real why there is such a spike in 2014 to 2016. Like you said, they are also in properties, hence it is not the logistics that is making the money. i am always worried over financial engineering - not saying TN is doing that but maybe can.

Another thing is that it is big in trucking. Trucking is dependent on fluctuations of fuel price. you can argue that it is same as Airasia. Well, I have small defence but not a very strong one.

Thank you for your kind reply. I think tnlogistic warehouse facility is quite lucrative and going forward will be the main driver also. The fact that their property business holding huge undeveloped land bank will keep their future development possible. However I am not too sure if their industry property development will do well or not in future.

Besides that, I have to admit that I am quite impressed with how freight management do their business with light asset strategy especially after the bfm talk. The way they do the sea freight business making them less vulnerable into the current issue of overcapacity, or in fact better off for them. Thats really impressive. I have not really understand so much of this area before the talk. Do tasco apply the same strategy or do they own the ship?

1. Market Valuation is cheaper than other logistic company in Bursa.2. Earning growth translates into a compounded annual growth rate of 15.1% from FY03 to FY14.3. Insider buying (YANG HENG LAM).

But past performance does not guarantee future performance, may I know why you consider Freight Management can complete with other logistic giant like Post/Gdex and so on...(Jack Ma may also set up their own logistic company to eat up this cake, you know China Business Man...)

Or you consider Freight Management is now the better choice because it is cheaper (with good record management) than other good logistic company, they are too late and high price to get in (If their price is not so high, you would prefer Post Or Gdex right)?

I would consider GDEX. But it is too expensive for my liking. Seldom do I chase after stocks especially when they are expensive.

As for POS Malaysia, although it is also doing courier business, I am not too positive. Another thing is that it is a Syed Mokhtar business, where usually there should be discount when valuing the stocks.

One must also understand, these courier companies they are mainly local Malaysian story i.e. there is so much they can grow. In all respective countries, they already have their champions. It is harder for POS Malaysia or GDEX to grow beyond Malaysia. Like you said Jack Ma has his own. LAZADA has LEX. But they use others like GDEX as well.

As for Freight, it is a consistent company - the interview with the MD has shown that the company invest with controlled aggression. I am betting on logistics growing with the digital free trade zone agenda. I think there will be more trade that happens with that as Freight I think will benefit.

The thing that I did not mention is that Malaysia is also investing a lot into ports - such as plan for the expansion of Westport, Pulau Indah and Pulau Melaka.

i have a better study on tnlogistic profit contribution and i found out that the property portion could be around 50% of the profit, or even up to 68% in current FY. Although in Malayisa they are good in trucking service and warehouses business, it somehow doesn't look so attractive for me already due to the property segment. While it could be benefited by DFTZ, but i am not too sure about how success and how big that will be contributed to its logistic segment. Any drop in its property segment will definitely cause the share price to tank and significantly drag down the company performance. Thinking maybe i need to sell off the shares haha

Disclaimer

The content here should serve as the opinion of the writer rather than as an advice to buy or sell. You should do your own research and/or seek expert's advice when doing your investments. Any decision that you made is your own and the author should not be held accountable.